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Why Gold Moves in the Opposite Direction of Interest Rates

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Interest rates and gold

Changes in precious metals are usually substantially impacted by changes in US interest rates. Last week, comments by Federal Reserve members significantly affected precious metals. Janet Yellen, chair of the Federal Reserve, took a less hawkish stance on January 19, 2017. Precious metals fell initially, but only a little. Earlier, Robert Kaplan, president of the Federal Reserve Bank of Dallas, joined the central bank officials and supported a gradual hike in US Treasury rates.

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The graph below compares the price of gold to the US two-year and ten-year interest rates. The higher the rates offered on US Treasuries, the higher the demand for that country’s currency. The rising US dollar also negatively impacts dollar-based assets. Most of the time, the relationship between gold and interest rates is inverse.

US interest rates

Investors were somewhat pessimistic about gold during the last quarter of 2016. Most of the fluctuations were due to news of an interest rate hike that circulated throughout the markets. Higher interest rates hurt the allure of precious metals, which don’t pay interest or offer any intermediary cash flows.

Precious metal mining–based funds such as the SPDR Gold Shares (GLD) and the VanEck Vectors Gold Miners ETF (GDX) also suffered during the last quarter of 2016 due to the rate hike.

The December rate hike also negatively impacted mining companies, including Newmont Mining (NEM), Goldcorp (GG), Yamana Gold (AUY), and New Gold (NGD).

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